Ashok Leyland's Q3 PAT below estimates

Higher tax rate, sequential fall in operating margin impact profit

Ashok Leyland's profit growth in the December 2014 quarter has disappointed the Street. According to consensus estimates, the company was expected to report a net profit of Rs 39 crore but it reported Rs 32 crore. Sales grew 73 per cent year-on-year (y-o-y) to Rs 3,290 crore, in line with Street estimates.

Analysts are positive on the stock, as there could be some quarterly blips that might have led to lower profit growth. One reason for the muted growth is a higher quarterly tax rate of 46 per cent. In the December quarter, Ashok Leyland managed to maintain the operating margin at 7.1 per cent against 7.3 per cent in the previous quarter, while the Street was expecting operating margin to improve to eight per cent.

Analysts believe heavy capital expenditure outlay over the past six years coincided with a protracted slowdown in commercial vehicle sales, which lasted all of 27 months. During FY09-14, the firm saw MHCV (medium and heavy commercial vehicles) volume growth of two per cent a year and an average Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin of 7.5 per cent. With the company near completing its capex and volumes reviving, it is set to turn cash flow-positive.

Analysts are expected to revise their full-year earnings estimates after the analyst call on Friday. Axis Capital, for instance, is expecting the company to report a net profit of Rs 165 crore in FY15. Ashok Leyland's net profit for the nine months of FY15 is Rs 104 crore. However, the fourth quarter is the best quarter for most commercial vehicle companies and that the third quarter need not be seen as a trend. For full financial year, analysts are building in MHCV volume growth of 23-25 per cent.

On the positive side, depreciation and amortisation expenses have declined sequentially, while other income jumped y-o-y. Analysts claim this supported the net profit growth. Interest costs, too, fell to Rs 98 crore during the quarter from Rs 115 crore in the year-ago period. However, other expenses have risen both y-o-y and quarter-on-quarter.

The stock has doubled in six months compared to a 31 per cent rise in the BSE Auto Index and 15 per cent in the Sensex.